Eliminate Procurement Headaches with Supplier Relationship Management

Cash-to-cash cycles, supply availability, cash flow. Some of the key elements that leaders in procurement and Supply Chain must manage to ensure profitability. In this article how to remove bottlenecks on such critical elements of the Supply Chain.

WHAT IS SUPPLIER RELATIONSHIP MANAGEMENT AND WHY DOES IT MATTER?

Supplier relationship management is a systematic approach to assess, manage, and improve suppliers' contributions to the business. It helps manage how suppliers contribute to the company's value chain and ensure they are performing against a set of performance indicators.

The main goal of an SRM strategy is to ensure the relationship is mutually beneficial and to improve business processes between the two parties; remove bottlenecks and constrains and enable the effective flow of goods and services between supplier and buyer.

IMPORTANCE OF SUPPLIER RELATIONSHIP MANAGEMENT

Ensuring the best prices is no longer perceived as a strategic capability of the procurement function. As a result of outsourcing of non-core competencies like supply planning or cost management, organisations are starting to realise that they have become more reliant on suppliers in terms of innovation, the security of supply and on-going cost savings.

Strategic partnerships are becoming a priority for many organisations, both global and SMEs and Supplier Relationship Management (SRM) is seen to be one of the remaining procurement topics that can still make a significant contribution to the value chain

WHAT MAKES SUPPLIER MANAGEMENT DIFFERENT FOR FMCG (CONSUMER GOODS) COMPANIES?

Consistency of supply: Being out of stock is one of the risks to avoid for companies in FMCG. Because of short lead times, erratic demand, low barriers to entry of new competitors and the threat of substitution constantly increasing a strategic relationship with key suppliers can make a difference between the continuity of an SME in FMCG.

A supplier can guarantee consistency of supply when it can:

• Consistently deliver goods on time
• Commit to a purchasing budget
• Meet quality requirements and pass audits
• Respond fast to an increase in demand
• Ensure consistent availability of materials to meet production requirements

WHAT ARE THE BENEFITS OF EFFECTIVE SUPPLIER RELATIONSHIP MANAGEMENT IN FMCG?

The main benefits of effective SRM can be categorised in financial, operational, and strategic benefits.

Financial:

• Best Price: A key supplier should guarantee the best price. This is not necessarily the lowest price, but a fair price for both the supplier and the customer, where both can benefit from a sustainable margin.
• Payment terms: Effective SRM strategy should enable payment terms for better cash flow that is a must for small companies in the growth phase.

Operational

• Quality: Audits and certifications that prove a supplier’s ability to run their operations effectively while meeting quality standards, which is a critical element for food and pharma companies. With effective SRM both suppliers and customers can support each other with obtaining certifications and pass audits.
• Logistics: Can a supplier store finished goods on the behalf of its customers? How much inventory of raw material can a supplier hold and for how long without affecting costs? These and other details will affect the supplier ability to increase production volumes at a short notice. Managing suppliers effectively also means arranging the logistics so that both parties can run smooth operations.

Strategic

• Innovation: Another key benefit of a healthy supplier relationship is when a supplier can add value to the company’s innovation journey. Collaboration between NPD and R&D teams of both parties is enhanced by an SRM plan that includes product design and innovation.
• Speed to market: Sharing customers data with a key supplier is not a crime anymore. On the contrary, good data shared with key players of the supply chain can help companies in consumer goods gain speed in routes to market. More on Route to market in this article from Entrepreneurs handbook
• Governance and Compliance: One of the key benefits of supplier relationship management comes within compliance. Working with compliant suppliers helps companies avoid supplier-related risks and ensuring consistent quality of the products purchased.

KEY FACTORS TO BUILD RETURN ON INVESTMENT (ROI) INTO YOUR STRATEGIC SUPPLIER RELATIONSHIP MANAGEMENT

Every business ecosystem that has clearly defined production and purchasing of products needs a supplier relationship management strategy. But managing relationships with suppliers is an effort that is relative to each organization.

Companies will reap benefits in different magnitudes from the application of SRM and a big part of those benefits depend on the effort, the resources and the technology used to implement the SRM strategy.

How can a company start seeing a Return On Investment (ROI) from the execution of SRM? The list below contains some metrics to determine if the SRM strategy is performing

• Purchasing costs: Have costs changed since the application of the new SRM plan?
• Admin time in purchasing and planning: Is the company spending less time managing purchase-related tasks?
• Production efficiency: Has the ratio between raw materials and finished goods improved?
• Design-to-shelf time: How has the average time from NPD to launch gone down?
• Quality issues/ product recalls: How many incidents, how sever and how long it took to resolve these since the application if the SRM plan?
• Product availability: Has stock availability improved?

COMMON RISKS IN SUPPLIER MANAGEMENT AND HOW TO AVOID THEM

Companies should not make the mistake of seeing supplier relationship management as a set of activities that bring intangible benefits only like better communication and faster conflict resolution. Supplier relationship management can and must deliver measurable benefits like cost-saving and inventory availability.

Other common mistakes companies make on supplier relationship management are not measuring KPIs, set up unrealistic expectations and seeing SRM as a tool to benefit only the buyer. Let us take a closer look in Figure below

HOW TO IMPROVE SUPPLIER RELATIONSHIP MANAGEMENT

Start by seeing your suppliers as business partners, not just vendors. Successful supplier relationships require two-way stream of data, recommendations, metrics and incentives ad it starts with a company understanding the real value of the entire supply chain and its main goal: To enable a company to provide its customers with products and services in a fast and cost-effective way.

Increasing customer value while ensuring profitability becomes the goal of supplier relationship management.

Here are a few elements to incorporate in a strategy to improve supplier relationships:

• Understand the costs and value created across the entire supply chain. A supplier cannot be fully evaluated without an understanding of all costs and the value provided by each element of the supply chain process. The goal is to benchmark supplier’s performance against the company’s processes and goals and not to set generic KPIs
• Acknowledge that supplier relationships go two ways. Companies misunderstand the true goal of SRM when they focus only on what suppliers can do for them. A true partnership leverages both parties knowledge and expertise to drive shared value across the supply chain and therefore to the customer.
• Accept accountability. Companies should take accountability for suppliers’ performance when communication and planning are required. Planning sufficiently in advance and sharing forecasts with a key supplier is a way to take accountability for the accuracy of the orders placed. If every order requires emergency handling, there is an effective relationship but just transactional trading.
• Share good-quality data as early as possible. Data is the oil that makes resilient supply chains work. Waiting to share information with suppliers can create lost opportunities for the company or excess inventory and added costs for suppliers. Sharing data constantly, with appropriate security and robust technology is critical for managing supplier relationships.
• Plan for contingencies. FMCG supply chains are often affected by unexpected events. A clear risk management plan is a must-have in any SRM strategy.

CONCLUSION

Managing suppliers is a task that requires planning, time, and resources. Companies can reap many benefits from managing suppliers effectively and companies in FMCG can go a step further by creating strategic partnerships with key suppliers. Reduced costs, consistencies of supplies, better compliance and faster road to market are only a few of the many benefits that companies can reap ny implementing an effective supplier relationship management plan.